With Janet Yellen Just Hours Away, Directionless Markets Wait For A Signal

With Yellen’s much anticipated speech just hours away, the already comatose market flatlined overnight in another directionless session, with European stocks and US equity futures practically unchanged, while Asian shares to a two-week low, led by Japan, as investors showed a reluctance to take on risk before Yellen’s speech. The dollar was a tad lower, along with oil which continues to move on every single OPEC-meeting headline, and is set for its first weekly drop in a month. 

The MSCI All-Country World index was down 0.1% in early trading, after slipping to its lowest level since Aug. 9, while the European STOXX 600 fell 0.2%. Cable extended a second weekly advance amid an ongoing short squeeze and optimism that the Brexit fallout may not be as severe as the doomer and gloomers had warned, after a report showed a pickup in U.K. consumer confidence and GDP of 2.2% which came in line.

That said, with volatility at generational lows, and “pent up” eagerness to break out on deck, stocks may just be waiting for the Yellen signal to break out in any direction.

As even NY hotdog vendors know by now, Yellen speaks Friday where she is expected to lay out the near-term future Fed policy, after comments by Fed officials in the past week signaled the economy is strong enough to withstand an increase in borrowing costs. Fed funds futures indicated a 57 percent chance of a rate hike this year even as evidence of uneven global growth casts doubt over the central bank’s willingness to tighten policy amid monetary easing in Asia and Europe. The probability of a September rate hike has rien to 32%, up from 22% a week ago, and the highest since Brexit.

Still, there is little hope Yellen will do or say much to clear up the prevailing confusion. Here are some last minute takes by financial analysts:

“Don’t expect Yellen to give a clear guidance in Jackson Hole,” said Ulrich Leuchtmann, the Frankfurt-based head of currency strategy at Commerzbank AG. “The Fed is data dependent at this point. Yellen’s topic is the ‘Fed’s toolkit’ and in talking about this she has to speak about expansionary instruments as well. She may say she can act in all directions. There is risk of market misinterpretation.”

“Definitely in focus today is the Jackson Hole meeting and Ms. Yellen’s speech,” said Michael Kapler, a portfolio manager at Mittelbrandenburgische Sparkasse in Potsdam, Germany. “Markets have been very, very quiet over the last few days. Most market participants are a little bit uncertain about the policy of the Fed because you’ve seen that over the last couple months they’ve been talking about interest rate hikes and then stepping back.”

“It’s a wait-and-see holding pattern now,” Chris Green, of First NZ Capital Group told BBG/ “In some ways, markets may be disappointed if they are looking for clarity for the rate decision. The usual modus operandi would be not to comment explicitly.”

“Markets are a bit worried about the upcoming comments from Yellen, which is understandable given how much of the market strength is due to central bank action,” said Philippe Gijsels, head of research at BNP Paribas Fortis in Brussels. “The fact that some of her disciples have indicated that it may be time to raise rates again has not done much in terms of calming sentiment. She will probably try to strike a balance between an improving U.S. economy and risks abroad.”

Chris Scicluna, head of economic research at Daiwa Capital Markets, took a similar line. “Yellen won’t be able to ignore the current debate but she can’t make a commitment either because there’s a range of views on the FOMC,” he said.

So with the main show looming, the dollar edged down and global shares slipped to a two-week low on Friday.

Europe’s Stoxx 600 Index slipped 0.1%, paring its weekly advance to 0.5%. The gauge has been trading in a tight range for most of the month, struggling to find a direction after a rebound of as much as 12 percent following the aftermath of the U.K. secession vote. French media company Vivendi SA fell 4.2 percent after reporting quarterly earnings that missed analyst estimates. Gemalto NV climbed 5.3 percent as the software firm posted an increase in net profit and said it is interested in buying Safran SA’s Morpho. Rio Tinto Group and Glencore Plc led a gauge of commodity producers to the best performance of the 19 industry groups on the Stoxx 600 as metals prices advanced.

In the US, S&P Index futures were little changed after U.S. equities slipped 0.1 percent on Thursday.  The MSCI Emerging Markets Index has dropped 1.2 percent since Aug. 19, halting six weeks of gains, the longest winning streak in more than three years.

As well as Yellen, investors will also look to data today, including reports on wholesale inventories and consumer sentiment, for indications of the health of the world’s biggest economy.

Market Snapshot

  • S&P 500 futures up less than 0.1% to 2174
  • Stoxx 600 down less than 0.1% to 342
  • FTSE 100 down less than 0.1% to 6814
  • DAX down 0.2% to 10510
  • German 10Yr yield down less than 1bp to -0.08%
  • Italian 10Yr yield up less than 1bp to 1.13%
  • Spanish 10Yr yield up 1bp to 0.93%
  • S&P GSCI Index down 0.4% to 361.8
  • MSCI Asia Pacific down 0.5% to 138
  • Nikkei 225 down 1.2% to 16361
  • Hang Seng up 0.4% to 22910
  • Shanghai Composite up less than 0.1% to 3070
  • S&P/ASX 200 down 0.5% to 5515
  • US 10-yr yield down 1bp to 1.56%
  • Dollar Index down 0.14% to 94.64
  • WTI Crude futures down 0.5% to $47.11
  • Brent Futures down 0.9% to $49.24
  • Gold spot up 0.2% to $1,325
  • Silver spot up 0.6% to $18.66

Top Global News

  • Icahn Said to Have Discussed Selling Herbalife Stake, WSJ Says: Carl Icahn has recently discussed selling his stake in Herbalife to a group incl. William Ackman, WSJ says, citing unidentified people familiar
  • Blackstone Unleashes Cash Hoard in Texas Shale Oil Land Grab: Permian attracting most investment during crude slump. Private equity giant commits $1.5b in two deals
  • VW Dealer Accord Said to Add $1.2b to Scandal Costs: Carmaker will buy back vehicles under same terms as consumers. VW given new deadline by judge for devising plan to fix cars
  • CEO of Denmark’s $120b ATP Pension Fund Steps Down; Carsten Stendevad plans to move back to U.S.
  • BOJ’s Impact Waning Even Before Review, Shadow Gauge Shows: BOJ easing has not fed into real economy, says Bank of America
  • Alphabet’s Nest Wants to Build a ‘Citizen-Fueled’ Power Plant: Nest targets 50,000 SoCalEd utility customers for thermostats. Program part of effort to address potential energy shortages
  • Citic’s Profit Plunges on ‘Lackluster’ Share Market, Yuan: 1H net income falls 46% y/y

* * *

Looking at regional markets, Asia stocks traded mixed following the weak lead from Wall St. as participants remained tentative ahead of the Jackson Hole symposium. Nikkei 225 (-1.2%) underperformed with the index briefly declining below 16,400 on a firmer JPY and CPI data which some feel dampens the likelyhood of further BoJ action next month. Financials dragged the ASX 200 (-0.5%) lower, although a mild rebound in commodities has stemmed losses. Chinese markets bucked the downbeat trend with Hang Seng (+0.5%) buoyed by reports the HK-Shenzhen connect regulations will be announced today, while the Shanghai Comp (+0.1%) was underpinned by better than expected earnings including Big-4 China Construction Bank and the largest weekly interbank liquidity injection in nearly 3-months. 10yr JGBs tracked T-notes lower despite the cautious tone in Japanese stocks, while the BoJ’s buying operations were also for a relatively reserved amount. China’s NDRC said there is plenty of room for China to guide interest rates lower. PBoC injected CNY 95b1n via 7-day reverse repos and CNY 50bIn in 14-day reverse repo for a net injection of 310bIn vs. Prey. net injection CNY 15.5bIn; which represents the largest weekly net injection in nearly 3-months

Top Asian News

  • Hong Kong Regulator Wants a Tighter Grip on IPOs in Blow to HKEx: Plan would see balance of power over IPOs shift to city’s SFC
  • BOJ’s Impact Waning Even Before Review, Shadow Gauge Shows: BOJ easing has not fed into real economy, says Bank of America
  • China’s Postal Savings Bank Said to Win $8b IPO Approval: Postal Savings Bank has more outlets than any listed lender
  • World’s Biggest Pension Fund Loses $52b as Stocks Slump: Japan’s GPIF wipes out all gains since shift to shares
  • Hong Kong Tribunal Finds Citron’s Left Culpable of Misconduct: Andrew Left claimed Evergrande Real Estate was insolvent
  • Citic’s Profit Plunges on ‘Lackluster’ Share Market, Yuan: 1H net income falls 46% y/y
  • Top Lotte Lieutenant Found Dead Amid Probe Into Korean Group: Prosecutors probing allegations of slush funds, embezzlement
  • Duterte Courts Risk in Deadly Drug War That Echoes Thai Crusade: Popular for now, Philippine leader could suffer as list of enemies grows

In Europe, similar to the lead up to Nonfarm Payrolls, markets are tentative ahead Fed Yellen’s speech. European equities are softer this morning (DAX -0.3%) as the markets remain within their tight ranges. The FTSE 100 is the best performer only down 0.1 % after energy sector names benefit from a slight early morning uptick in oil prices. Also of note, GDP readings from France and the UK both came inline with expectation and markets subsequently failed to react. In fixed income markets, supply from Europe remains light today with no real notable price action in the sector.
Top European News

  • AB InBev Said to Plan 5,500 Job Cuts After SABMiller Deal: Brewer to eliminate 3% of combined workforce over three years. Job cuts will form part of $1.4b cost savings from deal
  • VW Dealer Accord Said to Add $1.2b to Scandal Costs: Carmaker will buy back vehicles under same terms as consumers. VW given new deadline by judge for devising plan to fix cars
  • Vivendi Profit Declines as France Pay-TV Unit Remains Pressured; Earnings missed analyst ests. as Canal Plus lost money and subscribers in France
  • CEO of Denmark’s $120b ATP Pension Fund Steps Down; Carsten Stendevad plans to move back to U.S.

In FX, the Bloomberg Dollar Spot Index slipped 0.1% in early trade, leaving it up 0.2 percent for the week. Dallas Fed chief Robert Kaplan said Thursday the pace of interest-rate increases in the U.S. should be “patient and gradual” to limit impact on the dollar, while his Kansas City counterpart said it’s already time to move. Futures put the probability of a September rate hike at 32 percent, up from 22 percent a week ago. “The outcome of the Fed’s Sept. 21 meeting will be largely determined by the tone of Janet Yellen’s speech at Jackson Hole,” said Sean Keane, an Auckland-based analyst at Triple T Consulting and a former head of Asia-Pacific rates trading at Credit Suisse Group AG. If she continues the confident tone of some of her colleagues, “market expectations for a September rate increase will likely move up closer to 60 percent to 70 percent,” he said. The pound rose 0.2 percent and was headed for a 1.1 percent weekly advance, after a report showed U.K. consumer confidence rose the most in more than three years this month as the shock from Britain’s decision to leave the European Union faded. That adds to data last week that showed the initial economic effect of the U.K.’s secession may not be as severe as some economists feared. The yen traded at 100.45 per dollar, set for a 0.2 percent weekly decline. Japanese inflation data on Friday showed a fifth straight month of consumer-price declines, underscoring the challenges facing the Bank of Japan as it uses unprecedented monetary stimulus to try and revive the economy and inflation.

In commodities, crude oil slipped 0.3% to $47.17 a barrel. Saudi Arabia’s energy minister said an output freeze would be positive for the market, ruling out a cut. Oil fell earlier this week after a government report showed that U.S. crude inventories unexpectedly rose. Gold advanced 0.3 percent, paring its biggest weekly decline in more than a month, having fallen this week as speculation built that the U.S. will boost interest rates this year.

Looking at the day ahead, the calendar will be dominated by Yellen at Jackson Hole. The second reading of Q2 GDP will also be important, as well the Core PCE data. The Advance Goods Trade Balance data for July will also be released along with wholesale inventories, while finally the last revision to the University of Michigan consumer sentiment in August is due. Over the weekend we’ll also get industrial profits data out of China.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Markets remain steady ahead of a slew of tier 1 US data points and Fed Chair Yellen’s appearance at the Jackson Hole Symposium
  • Looking ahead, highlights include US GDP, US Trade Balance, U. of Michigan Sentiment and Fed Chair Yellen (Dove, Voter) speaks at the Jackson Hole Symposium at 1500BST/0900CDT
  • Treasuries show upside bias during overnight session before Fed Chair Yellen speaks at Jackson Hole Symposium at 10am; “the most active sector overnight was the U.S. bond market and that’s not saying much,” independent strategist Marty Mitchell said in note.
  • Fed Chair Janet Yellen probably won’t offer clear signals on the near-term policy outlook in her speech 10am Friday during annual Jackson Hole symposium, analysts say.
  • Fed fund futures pricing 50/50 chance of rate hike Dec. 2016; fully pricing next rate hike June 2017, implied rate 62.5bp, midpoint of 50-75bp target range
  • Federal Reserve Bank of Dallas President Robert Kaplan said the “jury is out” on whether the Bank of Japan’s negative rate policy is working, and monetary policy alone won’t fix the key problems Japan faces
  • Japan’s Government Pension Investment Fund posted a $52 billion loss last quarter as stocks tumbled and the yen surged, wiping out all investment gains since it overhauled its strategy by boosting shares and cutting bonds
  • Consumer prices in Japan fell for a fifth straight month, underscoring the central bank’s struggle to spur inflation to its 2 percent target
  • The man in charge of managing Sweden’s state debt signaled the Riksbank may soon be reaching the limits of its government bond purchase program amid signs that liquidity is suffering.
  • The Fed and other agencies are poised to issue a long- overdue report required by the law that lays out recommendations beyond the Volcker Rule to prevent financial firms from blowing up the economy, said two people with knowledge of the matter who asked not to be named before its release
  • The EU is overhauling the way supervisors set bank-specific capital levels for current and potential risks that aren’t covered by the minimum requirements in EU law

US Event Calendar

  • 8:30am: Advance Goods Trade Balance, July, est. -$63b (prior -$63.3b, revised -$64.5b)
  • 8:30am: GDP Annualized q/q, 2Q S, est. 1.1% (prior 1.2%)
  • 10am: U. of Mich. Sentiment, Aug. F, est. 90.8 (prior 90.4)
  • Fed’s Yellen to speak at Jackson Hole conference
  • 1pm: Baker Hughes rig count

DB’s Jim Redid concludes the overnight wrap

Will Yellen shock today? Because the month has been so dull, perhaps markets are getting too excited by the prospects of a meaningful speech by Yellen today that will give us a lot more clues on immediate Fed policy. However be warned because as DB’s George Saravelos pointed out yesterday, she has not traditionally used Jackson Hole as a vehicle to focus on policy guidance. Last year she didn’t attend and the year before her speech had no real immediate policy focus. Will this year be any different? The title of the speech is ‘The Federal Reserve’s Monetary Policy Toolkit’ and scheduled for 3pm BST/10am EST. There is no Q&A which might also lessen the impact. After listening to Saravelos yesterday, this morning I had a quick think back as to whether even Bernanke used Jackson Hole as a policy shaping platform. From a quick scurry through the archives, perhaps the only time was when QE2 was hinted at in 2010. So markets have probably subconsciously elevated the importance of the symposium for FOMC clues ever since.

Even if Yellen does comment on near-term policy would she really want to pre-commit to an imminent hike before September’s payroll? Probably not and therefore we’d expect her to be more ‘data dependent’ and more dovish in her comments than some of the recent Fed speakers who have been clearly itching to raise rates with less regard for the data.

It’s worth also noting that ECB President Draghi is skipping the Jackson Hole for a second successive year. There is however a potentially interesting panel discussion taking place on Saturday which will see the ECB’s Coeure and the BoJ’s Kuroda participate alongside the Governor of the Bank of Mexico. With high expectations for further BoJ action in September it’ll be interesting to see if Kuroda in particular is any more transparent.

The last 24 hours in markets have largely summed up what we’ve been put through for much of the past few weeks. US equities chopped and changed in a tiny range (0.42%) and eventually closed in the red (S&P 500 -0.14%). European equities were down a bit more (Stoxx 600 -0.84%) and were already weak heading into a disappointing Germany IFO survey (more on that shortly).

Credit markets were fairly unchanged and all this caution came despite Oil (WTI +1.20%) rebounding after Iranian news sources reported that Iran’s Oil Minister would attend an informal discussion with fellow OPEC members next month. There was no comment on the position that Iran would take at the meeting but the jawboning had another positive effect on the Oil price. Elsewhere Treasury yields edged slightly higher (10y +1.2bps to 1.574%) in part reflecting comments from Kaplan and George who lived up to their more hawkish reputation. The latter said that ‘when I look at where we are with the job market, when I look at inflation and our forecast for that, I think it’s time to move’. Kaplan said that ‘the case is strengthening’ for tightening soon. We go into today with a September hike now priced at 32% (from 22% this time last week) and December at 57% (from 51%).

Markets also seemingly chose to ignore what was much better than expected durable and capital goods orders data. Headline durable goods orders rose +4.4% in July (vs. +3.4% expected) while ex-transportation (+1.5% mom vs. +0.4% expected) also rose more than expected. Core capex orders (+1.6% mom vs. +0.2% expected) also beat and encouragingly have risen for two consecutive months for the first time since early 2015. Core shipments did fall slightly (-0.4% mom vs. +0.3% expected) although that was somewhat blamed on timings. Meanwhile, initial jobless claims held steady last week at 261k (down 1k) with the four-week average now at 264k. The services PMI declined 0.5pts this month to 50.9 which was disappointing relative to expectations (51.8 expected) and is actually the lowest reading since February. Finally the Kansas City Fed’s manufacturing survey rose 2pts to -4 (vs. -2 expected). The Atlanta Fed Q3 GDP forecast is now down to 3.4% (from 3.6%) reflecting Wednesday’s soft existing home sales data.

Speaking of data, also important today will be the first revision to Q2 GDP in the US, released just prior to Yellen’s speech at 1.30pm BST. Neither our US economists nor the market is expecting much change from the initial +1.2% qoq reading. What could be interesting however is what corporate profits show. As our US economists highlight corporate profits in the NIPA accounts have declined in four out of the last five quarters, an extremely rare occurrence outside recession. The weakness in the energy sector and the deleterious effects of a strong dollar have been well advertised however they highlight that domestic corporate profits (before tax with inventory valuation adjustment) excluding the energy sector and Federal Reserve Banks were still down -5.2% over the four quarters ending in Q1. The risk is that this eventually weighs on employment and wage growth, something Vice-Chair Fischer touched on last week. So it’s worth keeping an eye on those numbers.

Refreshing our screens it’s been another fairly mixed session in Asia this morning. While there are gains for the Hang Seng (+0.54%) and Shanghai Comp (+0.57%), the Nikkei (-0.97%), Kospi (-0.30%) and ASX (-0.17%) are all lower. The Yen is little changed but had been trading slightly stronger following a disappointing July inflation report in Japan. Headline CPI printed at -0.4% yoy as expected which was unchanged from June. The core excluding fresh food declined one-tenth to -0.5% yoy (vs. -0.4% expected) and the core-core fell two tenths to +0.3% yoy (vs. +0.4% expected). The figures were also weak on a seasonally-adjusted MoM basis. The data will only further increase the pressure on the BoJ to take action next month.

Moving on. The weaker Germany IFO survey which we highlighted earlier saw the headline business climate reading fall 2.1pts to 106.2 (vs. 108.5 expected) which is the lowest reading since February and also the biggest monthly decline since May 2012. Both the current assessment and expectations surveys tumbled 2pts. Aside from stable construction sentiment, weakness was fairly broad based across industries and will likely weigh on GDP estimates. France confidence indicators (particularly business and

manufacturing) were also a touch softer this month, however there was better news to come out of the UK where the CBI’s Distributive Trade Survey revealed a big pickup in retail sales volume to +9 from the post-Brexit -14 reading in July.

Staying with Europe, DB’s Marco Stringa yesterday updated us on Spanish politics where next week Rajoy will try to break a nine-month-long political stalemate by attempting to win a confidence vote in parliament. The first vote, which requires an absolute majority, should take place on 30 or 31 August. If unsuccessful, a second vote, which requires a simple majority, should take place on 2 September. While the report is not optimistic of a sustainable stable political outcome immediately after September 2nd, the central case scenario is for a centre-right PP-led minority government being formed before the 1 November deadline. They also think some volatility could be seen in the near-term for Spanish assets, but that the ECB’s buying program should ensure resilience.

Looking at the day ahead, this morning in Europe we’re kicking off with the latest Germany consumer confidence reading which could be interesting in light of yesterday’s IFO survey, while France consumer confidence and Q2 GDP follows. The ECB will release its latest money and credit aggregates data while the UK will also report its second reading for Q2 GDP (expected to stay unchanged at +0.6% qoq) along with the various growth components. As noted this afternoon will be dominated by Yellen at Jackson Hole. However the aforementioned second reading of Q2 GDP will also be important, as well the Core PCE data. The Advance Goods Trade Balance data for July will also be released along with wholesale inventories, while finally the last revision to the University of Michigan consumer sentiment in August is due. Over the weekend we’ll also get industrial profits data out of China.

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